There is no doubt about that! Dealing with debt can be a struggle. When the debt burden is very large, you certainly think about how to overcome it. You certainly like most people, you want to reduce the debt burden, but don’t want to damage your credit with bankruptcy. Debt consolidation may have been in your mind as an alternative solution. However, is this suitable for you?
If so, what is debt consolidation? Debt consolidation combines all your existing debt in various places into one place under a single debt shelter. Most people do this with a debt consolidation loan – a loan that has a specific purpose to pay off your debt. Other common ways of consolidating debts involve combining credit card debt with your mortgage, taking out a second mortgage or home equity loan, or using a student loan.
Of course, whatever method you use, the purpose of debt consolidation is to combine all your debt into a single loan. This is another point of view and the opinion of some experts about some types of debt consolidation loans including their advantages and disadvantages, which can be your reference before applying for debt consolidation.
This article is short but solid and comprehensive. We only focus on discussing the types and advantages/disadvantages of debt consolidation loan you need to know. What are the types, advantages, and disadvantages? Find the answer here!
In the meantime, if you need complete information about debt consolidation loan, you can read our previous article entitled
Types Of Debt Consolidation Loans
Paying debt can be very difficult, when at the same time you have to pay other debt installments such as credit cards, or other loans. You might consider a debt consolidation loan to help facilitate your debt payments.
Debt consolidation loans allow you to combine all your debts into a single loan with a lower interest rate. This is very useful when you have high-interest rate debt. This allows you to lower your monthly payments and make it easier to pay your monthly bills. There are several types of loans that you can use to consolidate your debt. Latoya Irby, as stated at https://www.thebalance.com classified loans into four types.
Home Equity Loans
Home equity loans are loans that are taken using the equity in your home as collateral. To qualify for a loan using home equity, you must have a sufficient amount of equity and good credit history. These loan models generally offer lower interest rates than other types of loans.
However, your home is now a bet for credit card debt. If debt repayment payments are delayed or stalled, you risk facing asset seizure at home. Therefore, it is not a good idea to use a home equity loan as a debt consolidation loan.
Credit Card Balance Transfers
With credit card balance transfers you are transferring your credit card balance to a single credit card – ideally with a low-interest rate. Low balance transfer interest rates are usually as promotional interest rates that end at least after six months.
If you choose to transfer balances, make sure you know when the low-interest rate will end and when the regular interest rate starts to apply to the remaining balance. The use of credit card balance transfers as a debt consolidation loan requires a credit card with a credit limit large enough to overcome all your credit card debt.
There is a downside when consolidating debt with balance transfers is a blow to your credit score. Making a credit card for a lot of debt can have a negative impact on the credit score because of your credit usage increases. While the good news is your credit score will go up when you pay the balance.
Personal loans can be used as a debt consolidation loan if you can apply for a large loan to cover all your balances. Personal loans are unsecured loans that have a fixed payment for a certain period of time. Once a personal loan is approved, you can use it to consolidate debt.
Regarding your loan application approval or disapproval, this really depends on your credit rating. You can have difficulty getting approval for a personal loan. You have bad credit, for example, you may be approved but with a higher interest rate or you may not be approved at all. You can take loans with high-interest rates but you must combine your balance. That obviously makes you unable to save money in the long run.
Debt Consolidation Loans
Debt consolidation loans are offered by banks and credit unions for one purpose combining your debt. There are various types of debt consolidation loans, so you need to choose wisely. The debt consolidation loan ideally has an interest rate lower than the interest you pay today.
However, sometimes a lower monthly payment is imposed by increasing the repayment period. This means you will have to pay more interest overall because of longer payment terms.